Box Office Is Recession Resistant, But Only to a Point

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Includes: DIS, DWA, NCMI, RGC, TWX
by: Steve Birenberg, CFA

For the first time since late December the weekend box office fell on a year-over-year basis. Weekend receipts for the top 12 films were $89.2 million according to BoxOfficeMojo.com, a drop of 15.8% from a year ago. The box office is still up 12% this year, a better than expected performance.

Next week provides another tough comparison, which may place some temporary pressure on the "box office is recession resistant" theme but things should pick up again the last week in March when Dreamworks Animation (NASDAQ:DWA) releases Monsters vs. Aliens against a very easy comparison.

For the theater stocks, the weekend box office dip may mark the end of a big rally that saw Regal Entertainment (NYSE:RGC) rise over 20% last week and in-theater advertising leader National Cinemedia (NASDAQ:NCMI) regain its September, pre-crash price level.

I think the box office is recession resistant but only to the tune of a 1-3% boost in attendance as consumers seek a relatively cheap night out and escape from reality. The big jump this year is because studios are releasing a lot of films that are reaching all the heavy, movie-going demographics including kids and families, teens, and young adults.

At the studio level, Disney (NYSE:DIS) got a much needed boost this weekend with a better than expected opening for Race to Witch Mountain. The film marks the biggest opening for The Rock and should be very profitable for DIS with what is likely to a modest production and marketing budget totaling less than $50 million. The film should be profitable in its theatrical run with DVDs, movie rentals, and film rights ultimately generating a very good return on investment for DIS. This film represents DIS' ideal release in non-franchise, live action....

....Also getting a boost this weekend is Lionsgate, which saw another good hold for Tyler Perry's Madea Goes to Jail. LGF management could use some good news as Carl Icahn and a former colleague are putting serious pressure on LGF in what has become a public dispute over the company's direction.

Time Warner (NYSE:TWX) is talking a good game on Watchmen but the 67% drop in the second weekend suggests the film will fall short of already reduced expectations. I now think the film will produce a small loss for TWX but I don’t expect a write-off and against over $6 billion in estimated 2009 EBITDA it is not a big problem. Rather it is a lost opportunity that reduces the margin for error in upcoming releases and 2009 estimates for the Filmed Entertainment segment.

Disclosure: TWX is held in Northlake client accounts including my personal accounts.